RISK ASSESSMENT

Recovery in activity in 2018

Activity in 2017 suffered, in part due to floods, landslides, and communications infrastructure disruptions triggered by the 2016-2017 El Niño costero weather phenomenon, and partly due to the suspension of public investment in the light of the Odebrecht corruption scandal. A sharp recovery in domestic demand is expected in 2018, in a context of upheld positive economic and monetary policies. Construction work, such as the building of the gas pipeline in the south of the country, is expected to resume. Ahead of the 2019 Pan-American Games in Lima, infrastructure construction for the event is set to continue, alongside the building of a second Lima subway line and the modernisation of the Talara refinery by Petroperu. With the recovery – albeit slow – in raw material prices, mining investment is starting to pick up. In addition, a three-year plan for the rebuilding of damaged roads, bridges, housing, and schools was approved in September 2017. Household consumption is expected to feel the benefits of the new jobs created as investment increases, as well as the slowing in inflation resulting from slower rises in food prices, and the expected slight depreciation of the Peruvian sol. The emergence of downward pressure on inflation led the central bank to lower its reference rate on two occasions (January and March 2018). Private investment should benefit from this policy, but will be affected by the increase in political uncertainty (business confidence remains low). The continued recovery in metal prices – mainly copper (29% of sales), gold (19%), hydrocarbons (6%), zinc (5%) and lead (4%) – should encourage further increases in exports, although less than those seen in 2017. Sales of seafood, fruit (grapes, avocados, pineapples, mangoes, berries, etc.), as well as fish-meal (5%) are expected to do well, except in cases of extreme climate events. The rise in imports, supported by the strength of domestic demand, is unlikely to lessen the positive contribution of net exports to growth, even though it is estimated to be slightly down from 2017’s level.

Comfortable budget margins and current account deficit financed by FDI

The government is expected to continue its relaxed budget policy in 2018, with a particular focus on infrastructure, education, healthcare, access to drinking water, and sewage systems. However, the government does seem to have – at least temporarily – abandoned corporate tax cuts, with the aim of reducing the scale of the economy’s informal sector and increasing fiscal revenues (23% of GDP). The authorities have also triggered the hardship clause in the budget regime. This approach is made easier thanks to the small relative size of the debt, which remains below the legal ceiling of 30%. The 1% deficit target for 2021 remains achievable.

The current account deficit will likely continue at a moderate level. The trade surplus – generated notably by metal sales expatriate worker remittances and tourist income – is set to partly offset the repatriation of profits by foreign investors and foreign transport services. This deficit is well-funded thanks to foreign investments, which enable the central bank to increase its already substantial currency reserves (around 15 months of imports), giving it the ability to intervene to prevent excess volatility in the sol. Although in decline, dollarisation still covers 45% of deposits and 30% of outstanding credit. A sharp depreciation would endanger what is otherwise a solid banking system.

Increased political uncertainty

With relations between president and parliament already being tense, the succession of cases related to the Odebrecht scandal finally led to the resignation of president Pedro Pablo Kuczynski (PPK) in March 2018. PPK, of the centre-right party, Peruanos por el Cambio, had narrowly won the Peruvian presidential elections (50.1% of the vote) in 2016 against Keiko Fujimori, daughter of former (currently imprisoned) President Alberto Fujimori of the conservative Fuerza Popular (FP) party. PPK, who was implicated in the Odebrecht scandal for receiving money when he was finance minister, narrowly escaped impeachment in December 2017. In Congress, where his party holds only 17 seats out of 130 against the FP’s 77, he was saved by Kenji Fujimori, Keiko's brother, who refused to support the vote. However, the release in early March of videos showing Kenji Fujimoko buying parliamentarians’ ballots to support PPK during the December vote damaged the credibility of both men. Called to resign by the parliamentarians from his own party, PKK finally resigned at the end of March 2018. Vice-President Martín Vizcarra will take over the presidency until 2021. The new government’s programme, although entirely renewed, should, however, follow the path of previous one, aiming at increasing social integration and encouraging private investment (local and foreign) through the easing of administrative formalities, the labour market, and tax incentives. Particular attention is being paid to the fight against corruption, with the adoption of a new law in April 2018, and to easing tensions with Congress. Welcomed by the markets, these new measures should make it possible to reduce political uncertainty in the country, although the challenge of effectively translating these measures into an increase of economic growth remains.

Last update: April 2018

Payment

Cheque use in Peru is in decline due to the increasing preference for electronic payment for both high-value and low-value transactions. Post-dated cheques are commonly issued in Peru.

Credit transfers are used for both high-value and low value payment transactions. There is a minimum transfer amount for high-value transactions (PEN 5000 or USD 2000) for third party transfers. The majority of low-value electronic credit transfers in Peru continue to be made between accounts in the same bank, known as intrabank or “on-us” transactions.

Bills of exchange are a commonly used payment instrument for debt collections.

Debt collection

Legal proceedings

The Peruvian judicial system is structured hierarchically. The Corte Suprema (Supreme Court) is the highest court, followed by courts that specialise in civil law, criminal law, constitutional law and labour law. These sit above the Corte Suprema in each judicial district, which deal with civil and commercial law cases. The Juzgados Especiales (specialised judges) are located in major cities in the country and deal with matters concerning, among others, civil and commercial law. Following this is the professional Juzgados de Paz (peace judges), located in major cities in the country, and in charge of low economic value cases and other minor issues. Finally, Cortes de Paz (peace courts) are located in cities with lower populations, comprised of one judge who may or may not have the status of lawyer.

Amicable phase

The amicable phase in Peru is characterised by phone calls, written reminders, visits, and meetings, with the goal of settling the debt between two parties without triggering legal proceedings.

Conciliation Proceedings

Prior to judicial proceedings, Peruvian law requires the initiation of a conciliation process in order to reach a debt settlement agreement. The process constitutes two hearings, to which both parties are summoned, with the aim of reaching an agreement. If an agreement cannot be reached, the proceeding ends, and both parties have to sign a conciliation act, which is then presented at the beginning of the judicial process.

Fast-track proceedings

The below text makes reference to the Unidad de Referencia Procesal (Unit of Procedural Reference), which is a reference value according to Peruvian law: each Unidad de Referencia Procesal is 10% of the Unidad Impositiva Tributaria (UIT), which can be used in tax regulations to determine tax bases, deductions, limits of affectation and other aspects of taxes that the legislator deems appropriate. It may also be used to apply sanctions, to determine accounting obligations, register in the register of taxpayers and other formal obligations. In Peru, the UIT is set at the beginning of the year by the Economic Ministry.

Two fast-track proceedings are available in Peruvian law:

Simplified proceedings (proceso sumarisimo) concern to cases provided by Peruvian law and for cases which the value is below 100 Unidades de Referencia Procesal. Juzgados de Paz have jurisdiction for amounts between 50 and 100 Units. Defendants have five days to file a dispute after they received the notification from the judge. Within ten days, the judge organises hearing for discovery, conciliation, evidence and judgment.

According to Peruvian law, shortened proceedings (proceso Abreviado) concern cases in which the value is between 100 and 1,000 Unidades de Referencia Procesal. Juzgados de Paz have jurisdiction for amounts between 100 and 500 Units and Juzgados Civiles have jurisdiction in cases for amount above 500 Units. The defendant has ten days to file a dispute from the admission of the petition by the judge. Discovery and conciliation will be examined during one hearing. If the conciliation was not successful, the judge mentions the disputed points and evidence to be provided or updated. Within 50 days of the conciliation hearing, the judge sets up an evidence hearing.

Executive proceedings

When creditors are owed an undisputed and certain debt, they can start executive proceedings. The debtor has five days from the notification to submit his defence. The judge will render a judgment, after which each party has up to three days to file an appeal.

Ordinary proceedings

Ordinary proceedings apply to cases whose value is over 1,000 Units of Procedural Reference. The plaintiff sends a written petition to the court. The defendant can file a defence expressing the facts on which he intends to argue, within 30 days from the service of the writ. If the claim is complete (i.e. includes all the relevant information), the judge sets up a hearing for conciliation. If the parties reach an agreement, it has the same effect as a judgment. If an agreement is not reached, the judge organises a hearing within 50 days of the conciliation hearing. The proceedings end when the judge delivers his or her decision.

The length of proceedings depends mainly on the nature of the conflict, the number of parties involved, the complaints that occur, and the caseload of the judge in charge of the process. Based on these criteria, a first-instance judgment in a typical commercial litigation case may take approximately twelve to eighteen months.

Enforcement of a legal decision

A domestic judgment becomes final and enforceable once all venues for appeal have been exhausted.. The first instance judge is in charge of enforcing judgments, and will issue a writ of execution ordering the relevant party to comply with the judgment within five working days. If the order is not complied with during the five-day period, the judge must order the seizure of the debtor’s assets in order to sell them at auction.

For foreign awards, creditors located in Peru must file a claim before the Superior Court located in the debtor’s place of domicile. The Court will consider whether the foreign judgment is compatible with Peruvian law and any international treaties between the two countries.. If it is found to conform, the judge shall authorize the enforcement of the judgment in the Peruvian Jurisdiction.

Insolvency proceedings

Peru’s insolvency law allows for involuntary or voluntary liquidation proceedings as well as for reorganization. The Instituto Nacional de Defensa de la Competencia y de la Proteccion de la Propriedad Intelectual (INDECOPI) is the specialized administrative agency that deals with insolvency proceedings.

Out-of-court proceedings: preventive proceeding

Preventive proceedings aim to provide a forum for debtors to reach a consensual restructuring agreement with their creditors. It is intended to be a fast track process that only debtors can initiate.

Reorganisation

If creditors decide to allow their debtors to restructure, they will be asked to approve a reorganisation plan within 60 days from the decision to proceed with reorganization. Both the decision to reorganise and the organisation plan must be approved by more than 66.6% of the allowed creditor claims. During the process, creditors decide whether to allow the debtor’s management, to continue operating the business, or to replace the debtor’s management. Once the reorganisation plan is approved and all the pre-publication claims are paid according to their terms, then INDECOPI grants a decision declaring the formal conclusion of the reorganization proceeding.

Liquidation

If the creditors decide to liquidate, then a liquidator will be appointed at the Creditors’ Meeting from the list registered with INDECOPI. The will be asked to approve a liquidation plan for the debtor and decide whether the debtor should be authorized to continue its business during the liquidation. Whether voluntary or involuntary, the liquidator must follow a mandatory order in the payment claims.

To conclude the liquidation process, the liquidator files a petition before the Public Registry in order to register the extinction of the company. However, if creditors remain unpaid, then the liquidator must file a petition before a civil judge to obtain a judicial bankruptcy declaration.